Feisty greenback: Dollar continues to hold its own

It's one of the anomalies of our time, but not for those with critical and discerning eyes. Stock market institutional bulls and bears have renewed their battle over Dow 8,000, the federal budget deficit will exceed $1 trillion for at least the next two years, and Congress will likely have to raise the national debt ceiling to about $13 trillion -- all bearish news for the dollar.

In fact, one could make a strong argument that 2008 was the worst year for the both the U.S. banking sector (U.S. taxpayers can vouch for that) and the U.S. stock market (take a look at your 401k) in three generations. And what's the dollar done during that 12-month period? It'sstrengthened against the euro (16 percent), British pound (25 percent), and Swiss franc (9 percent).

More evidence of the "theatre of the absurd" mentality gripping the markets?

Not quite.

The buck holds its own

First, and perhaps foremost, the U.S. trade deficit is shrinking. In February, the trade deficit fell to -$26 billion, and that represents a large 58 percent decline compared to a year ago. Not surprisingly, U.S. consumers are buying fewer imported goods -- more than enough to offset a decline in U.S. exports. The dollar is being supported by U.S. consumers and businesses retaining more of their dollars at home.

Second, as stressed as credit markets are and as constrained as lending is, there are signs of financial system stabilization. The Fed's quantitative and superquantitative easing strategies are reliquefying credit markets, and the U.S. Treasury's plan to remove toxic assets from the banking system, although likely to be revised, does nevertheless present a long-term plan to rid the financial system of the these problematic assets. So long as the currency and equity markets continue to see progress on asset removal, the dollar will remain stable against the world's other, major currencies, Currency Trader Andrew Resnick told DailyFinance today.

Further, Resnick underscored that it's important for the typical investor "to look beyond the headlines of rising unemployment, bank write-offs that can block out fundamental changes that point to a resumption of growth."

"Traders and investors look down the field. We're trained to identify longer-term themes and match both trading and investment strategies to take advantage of those themes, and not to be distracted by short-term, emotional events," Resnick said. "And there's building sentiment now that the entrepreneurial system in the United States will be able to grow and prosper, while at the same time implement smart regulations to limit the excesses that helped create the financial crisis.That's what the typical investor has to concentrate on."

Jobless claims stall: A green shoot?

Third, the U.S. economy, while still in a pronounced recession, is beginning to show "green shoots," in the interpretation of Fed Chairman Ben Bernanke. One indicator, initial jobless claims, appear to be struggling to make new highs: claims fell to 610,000 last week from 653,000 the previous week. To be sure, the 600,000 figure is high and intolerable, but historically, one of the first signs of a bottoming recession occurs when initial jobless claims fail to continue to make new highs. Hence, if the metric can't break through 700,000, that could signal the beginning of a GDP bottom. Investors should keep in mind that the unemployment rate may still continue to rise, but if the new layoffs peak, that historically has meant a recovery is not far off.

The dollar is also benefiting from a "we're in the same boat" condition permeating the markets. It's not that the dollar and the U.S. economy are fundamentally sound -- they aren't -- it's that comparable conditions in Europe and Asia aren't that much better. Hence, conditions that would normally create a weak dollar are being canceled out, more-or-less, by conditions that are resulting in a weak euro and pound.

Finally, despite a decade of policy errors by the United States, the dollar remains a safe haven -- the world's safest investment after gold (and some argue, it's safer than gold). Despite the U.S.'s large national debt, major capitalization, and economic repair tasks ahead, investors buying dollars are saying they are confident the United States will recover -- in other words that it has both the resources and the political will to end both the financial crisis and the recession.

Currency Analysis: The dollar's strength protects, to a certain extent, the value of U.S. investments and makes it less likely financial institutions will start pulling money out of the United States as it heals credit markets and jump-starts the economy. The dollar's strength also has lowered short-term interest rates for the U.S. government -- enabling the federal government to finance its huge deficit at interest rates lower than would be the case in normal market conditions; that represents a huge interest expense savings for the U.S. taxpayer.

Moreover, the above underscores the fact that the United States remains a very fortunate country, currency-speaking. No other nation in the world could run a record budget deficit, have its economy fall into a recession, post massive bank write-offs, and see its currency hold its own against the world's other, major currencies.

Further, after the U.S. economy's recovery is firmly in place, that's all the more reason for President Obama and Congress to cut the U.S. budget deficit and begin paying-down the national debt. The low-interest-rate period produced by the huge flight-to-safety by institutional investors won't last forever; hence, the smaller the U.S. budget deficit is, the lower the U.S.'s interest costs will be in the decade ahead.